JUDGMENT
A. Pasayat, J.
1. On being moved by the Revenue under Section 256(1) of the Income-tax Act, 1961 (in short, “the Act”), the Income-tax Appellate Tribunal, Cuttack Bench, Cuttack (in short, “the Tribunal”), has referred the following questions to this court :
” 1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in modifying the order of the Commissioner of Income-tax passed under Section 263 of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the total income on which deduction under Section 36(1)(viii) of the Income-tax Act, 1961, has to be computed must be calculated before deducting relief allowable under Section 36(1)(viii) ?”
2. The background facts as culled out from the statement of the case are to the following effect :
M/s. Industrial Promotion and Investment Corporation of Orissa Limited (hereinafter referred to as “the assessee”) filed its return of income for the assessment year 198.1-82. A net profit of Rs. 7,24,255 was declared. The assessee had created a reserve of Rs. 2,89,702. The Assessing Officer was of the opinion that the assessee was entitled to deduction of 4D per cent, of the total income under Section 36(1)(viii) of the Act, but limited the same to the reserve created of Rs. 2,89,702. The Commissioner of Income-tax, being of the view that excess relief of Rs. 69,688 has been granted, initiated proceedings under Section 263 of the Act. According to the Commissioner, the deduction was to be of the specified percentage of the total income before making any deduction under Chapter VI-A of the Act, as reduced by the deduction allowable under that section, i.e., under Section 36(1)(viii). In response to the notice issued, the assessee submitted that, under the relevant provision as it stood at the relevant time, deductions were to be allowed without reducing the deduction allowable under Section 36(1)(viii). Placing reliance on Instruction No. 1275, dated August 13, 1979, issued by the Central Board of Direct Taxes, the Commissioner was of the view that the assessee had been granted excess relief of Rs. 69,687. He also noticed that, under Section 35D, an excess relief of Rs. 6,570 had been granted. The assessee did not question the legality of the latter view, but carried the matter in appeal so far as the direction of the Commissioner relating to deduction under Section 36(1)(viii) of the Act was concerned. The Tribunal found that the view taken by the Commissioner was not correct and that the deduction as originally granted was in order. In view of this conclusion, the Revenue moved for a reference under Section 256(1) and, as aforestated, two questions have been referred to this court,
3. For resolution of the dispute as to what would be the quantum of deduction, it is relevant to refer to Section 36(1)(viii) of the Act as it stood at the relevant time.
“36. Other deductions.–(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28– …
(viii) in respect of any special reserve created by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent, of the total income (computed before making any deduction under Chapter VIA) carried to such reserve account :
Provided that the corporation or, as the case may be, the company is for the time being approved by the Central Government for the purpose of this clause :
Provided further that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid-up share capital (excluding the amounts capitalised from reserves) of the corporation, or, as the case may be, the company, no allowance under this clause shall be made in respect of such excess.
Explanation.–In this clause, ‘public company’ shall have the-meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956). ”
4. Clause (viii) as was originally enacted corresponds to Section 10(2)(xiva) of the 1922 Act. The old provision was re-enacted in identical terms in the 1961 Act. But, subsequently, it has undergone several amendments by the Finance Act, 1966, with effect from April 1, 1966 ; the Finance (No. 2) Act, 1967, with effect from April 1, 1968 ; the Finance (No. 2) Act, 1971, with effect from April 1, 1972 and the Finance Act, 1974, with effect from April 1, 1975. There have been substitutions and insertions by the Finance Act, 1979, with effect from April 1, 1980 ; the Finance Act, 1981, with effect from April 1, 1982. The original Explanation which was inserted by the Finance Act, 1970, with effect from April 1, 1966, was omitted by the Finance Act, 1974, with effect from April 1, 1975. A new Explanation was inserted by the Finance Act, 1979, with effect from April 1, 1980. With effect from April 1, 1985, there has been an amendment by the Finance Act of 1985 (Central Act No. 32 of 1985). The object of the amendment is set out in the memorandum explaining the provisions in the Finance Bill as follows (see [1985] 152 ITR (St.) 175).
“106. Financial corporations engaged in providing long-term finance for industrial or agricultural development in India or public companies providing long-term finance for construction or purchase of houses in India for residential purposes are entitled to a deduction, in the computation of their taxable profits, of an amount not exceeding 40 per cent, of the total income carried to a special reserve. Under the existing provisions, the total income for this purpose is the total income as computed before making any deduction under Chapter VIA. It is proposed to provide that the deduction shall be for an amount not exceeding 40 per cent, of the total income as computed before making any deduction under the aforesaid provision and Chapter VIA.” (underlining * by us for emphasis)
5. Before the amendment, obviously, the deduction under the provision, i.e., Section 36(1)(viii), was not to be considered. “Total income” is defined in Section 2(45) of the Act. It means the total amount of income referred to in Section 5, computed in the manner laid down in the Act. Chapter III deals with incomes which do not form part of total income. Certain deductions are provided for in Chapter VI-A. For the purpose of determining the maximum limit of allowable deduction in Clause (viii), the figure of total income computed before making any deduction under Chapter VI-A has got to be taken. According to the Department, the total income must be the total assessed income plus the amount of deduction allowable under Chapter VI-A of the Act. If such a view is taken, the amended provisions would be wholly otiose and inept. If the position was as suggested by the Department, the amendment was not necessary. Under the provisions of the relevant clause of Section 36(1), an amount not exceeding forty per cent, of the total income computed before making any deduction under Chapter VI-A has to be deducted. The total income on which the deduction is admissible has to be the total income before making any deduction under Chapter VI-A of the Act only. We are, therefore, of the view that the Tribunal was justified in setting aside the order of the Commissioner passed under Section 263 of the Act. It was right in holding that the deduction permissible under Section 36(1)(viii) of the Act was to be calculated on the assessee’s total income as it stood before the deduction allowable under Section 36(1)(viii) of the Act. A view similar to ours has been expressed by the Patna High Court in CIT v. Bihar State Financial Corporation [1983] 142 ITR 518 and CIT v. Bihar State Financial Corporation [1986] 159 ITR 275 (Patna), the Andhra Pradesh High Court in CIT v. Andhra Pradesh State Financial Corporation [1989]
175 ITR 87, and the Madhya Pradesh High Court in CIT v. M. P. Audyogik Vikas Nigam Ltd. (No. 2) [1989] 178 ITR 179. In view of our analysis, we differ from the contrary view expressed by the Karnataka High Court in Karnataka State Financial Corporation v. CIT [1988] 174 ITR 206.
6. Our answers to the questions, therefore, are in the affirmative so far as both the questions are concerned. The reference application is, accordingly, disposed of.
S.K. Mohanty, J.
7. I agree.